Political Wisdom: Will the Bank Overhaul Bill Work?

By

Mary Lu Carnevale

Jun 26, 2010 7:30 am ET

It was a long night. But early Friday morning, House and Senate Democrats reached a compromise on legislation to revamp government rules for banks and financial markets – a response to the financial crisis that will usher in the biggest changes in financial regulation in decades. The legislation is expected to clear both the House and Senate this coming week and to be signed into law by Independence Day.

President Barack Obama gets the leverage he wanted to push other G-20 leaders meeting in Canada this weekend to toughen their own rules. At the same time, financial and political analysts are reading the fine print to figure out who wins and who loses.

The overhaul, which still requires approval from the full Congress, won’t shrink banks deemed “too big to fail,” leaving largely intact a U.S. financial industry dominated by six companies with a combined $9.4 trillion of assets. The changes also do little to solve the danger posed by leveraged companies reliant on fickle markets for funding, which can evaporate in a panic like the one that spread in late 2008…

The legislation is “largely a fig leaf,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “Given where we were when this got started, I’d have to imagine the Wall Street firms are pretty happy.”

Banks avoided drastic curbs on their highly profitable derivatives businesses. Lenders including JPMorgan and Citigroup Inc. will be required to move less than 10 percent of the derivatives in their deposit-taking banks to a broker-dealer division during the next two years, which may require additional capital.

Sen. Blanche Lincoln pushed an amendment that would have barred banks from the derivatives business, but it underwent some last-minute changes. Jonathan Allen and Meredith Shiner at Politico say the Arkansas Democrat – and everyone else – can claim victory.

As Washington and New York try to sort out the winners and losers in Wall Street reform – did the banks roll Blanche, or did she inflict a measure of populist pain? – a look behind the scenes reveals that the midnight-hour derivatives deal she struck with the White House and congressional leaders bears the trademark stamp of any good backroom accord: Everyone can claim victory.

Lincoln’s provision – a mainstay of her tough re-election campaign – remains standing, if a bit riddled with loopholes. She fought Wall Street and Washington and lived to tell about it. And surely she will this fall, over and over again…